Companies bring together people with a similar vision and views on business, but it is not always easy for owners to make joint decisions. Sometimes shareholders can get stuck with different opinions. Fortunately, there are some mechanisms in company law to overcome it. These arrangements can be enshrined in companies’ statutory documents in the form … Read more RUSSIAN ROULETTE CLAUSE
In our previous publications, we have drawn attention to the idea of vesting of options and reverse vesting of stock, which means that the founders of a start-up can receive stocks that they do not completely own, because a company has the right to repurchase them (in reverse vesting); or employees get the right (option) … Read more MAKING A SECTION 83(B) ELECTION UNDER U.S. LAW
As we have already discussed in our previous publications, the process of raising investments to a company may require several important legal documents to be drafted and agreed upon, including an investment agreement, shareholders or investors rights agreement, bylaws and a revised articles of association or a certificate of incorporation of a company, depending on … Read more REVERSE VESTING: A MECHANISM THAT HELPS RETAINING FOUNDERS
Share or option vesting is a retention mechanism, intended to secure the engagement of founders, employees, and advisors, over time or when hitting certain milestones. Vesting allows equity grantees to earn their share over a period of time, or when achieving certain milestones. On the other hand, vesting acceleration allows founders, employees and advisors to … Read more Double Trigger on Option [Vesting] Acceleration – Meaning and Importance
Shares that are sold by a company, usually in the case of issuance, result in existing investor-holding dilution, unless they participate, of course. To protect their investments, sophisticated investors have introduced a variety of mechanisms to the venture capital world. One of these important mechanisms is anti-dilution. Anti-dilution protection is exercised by holders of preferred … Read more Anti-Dilution – The Good, the Bad and the Ugly
Investors purchasing preferred stock, usually demand to have a liquidity preference mechanism, whereby their purchased stock is being cashed out on preferred terms, in the event of an M&A, or liquidation of the Company. Preference provisions serve as a hybrid mechanism, combining equity and debt concepts. Although preferred shares are, at the end of the … Read more Liquidation Preference: Meaning and difference between “participating” and “non-participating” liquidation preference
Right of First Refusal and Co-Sale Agreement is one of the standard transaction agreements executed in the framework of a US based startup’s financing round, based on the NVCA templates. This agreement envisages different rights, the two key being a right of first refusal, and a co-sale right. We discussed the right of first refusal … Read more Right of Co-Sale
SAFE is an agreement used by startups mainly to raise funds during their seed financing rounds. By using a SAFE, investors invest capital in the company, which converts into equity upon certain trigger events, most commonly a subsequent financing round. A SAFE could contain investor-“friendly” economic mechanisms, such as discount and valuation cap, the first … Read more Purpose of Valuation Cap in SAFE
A term sheet outlines the rights and obligations of parties involved in private equity transactions. Generally speaking, most term sheets being provided by venture capital firms or potential acquirers are non-binding, with only two provisions considered to be binding upon the transacting parties – confidentiality and no-shop (also referred to as “exclusivity”). There are important … Read more No Shop Provision in Term Sheet and its Implications
Breakup fee clause, also known as “termination fee” clause, is often included in the Letter of Intent, a Memorandum of Understanding, a Term Sheet or other preliminary documents involved in Mergers and Acquisitions transactions (M&A). Although, as a general rule, M&A’s letters of intent tend to be non-binding in nature, the breakup fee clause is … Read more Why Breakup Fee clauses needed in M&A transactions?
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